Citco launches automated waterfall calculation tool

The product, Citco Waterfall, launched in Q2 this year to meet demand from GPs, who sought a better method for calculating waterfall payments in a standardized way.

Financial services firm Citco Group has created a technical tool that allows private equity firms to calculate waterfall payments in a standardized way.

Citco Waterfall is designed to automatically update any inputs made by firms on their general ledger, making waterfall calculations a quicker process than the traditional method of manually changing the numbers on an Excel spreadsheet as well as on the general ledger.

Citco head of private equity and real estate services Nikolaos Perros told pfm that the Citco Waterfall tool simplifies the process in which fund managers have to calculate and enter varied numbers for carried interest percentage, based on different preferred returns, expenses, and other terms, for every fund they oversee.

Right now, most GPs use financial models built using Microsoft Excel with “thousands of columns and rows” that are not automatically synced to the general ledger, Perros said. But the Citco Waterfall tool is linked to the general ledger so that numbers are automatically calculated and updated based on existing formulas.

“The tool creates mathematical formulas and runs the numbers in a way that clearly shows every tier of the waterfall calculation,” he said.

Once the calculations are automatically done on the platform, limited partners can look at all the numbers via either online access or reporting from the general partners.

The idea to develop Citco Waterfall blossomed three years ago, when Citco asked its clients what issues they were spending a lot of time on, and was most fraught with errors.

“Everybody told us the same thing: it was the waterfall calculations associated with carry allocations between the GP and the LP,” Perros said. “We spoke to people on the ground doing that work, like CFOs and controllers, and they told us they need a tool which automates the manual process.”

The platform launched in the second quarter this year, according to Perros. Citco has already started onboarding some of its existing clients. All the new clients today are starting directly on Citco Waterfall, while existing clients are being evaluated on whether it’s appropriate to move them to the new tool. For example, if the fund is in wind-down mode, Citco will keep them on their Excel method because “the conversion outweighs the benefit given the remaining life of the fund,” Perros said.

So far, the clients using Citco Waterfall fall in the mid- to large-cap range, Perros said, with an AUM of between $500 million and $3 billion.